Equity Commonwealth (EQC) 2006 Q3 法說會逐字稿

Good day and welcome to the HRPT Properties Trust third quarter 2006 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to the Manager of Investor Relations, Mr. Tim Bonang. Please go ahead sir.

Thank you, Stacey. Joining me on today's call are Adam Portnoy, Managing Trustee, and John Popeo, Chief Financial Officer. The agenda for today's call includes a presentation by management followed by a question and answer session. Before we begin today's call, I would like to read our safe harbor statement. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and the Federal Securities laws. These forward-looking statements are based on HRPT's present beliefs and expectations as of today November 3, 2006. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission regarding this reporting period. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our Form 10-K filed with the Securities and Exchange Commission and in our Q-3 supplemental operating and financial data found on our Website at www.hrpreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements. Now, I would like to turn the call over to Adam Portnoy.

Thank you, Tim. Good afternoon, and welcome to everyone that is joining us on today's call. For the third quarter we are reporting FFO of $0.30 per share compared to $0.32 per share for the same period last year. It is important to note that this year-over-year comparison is somewhat misleading. Our 2005, third quarter FFO included about $6.6 million or $0.03 per share of income from lease termination fees and contributions from our investments in our former subsidiaries. This year's third quarter FFO includes almost no lease termination fees and excludes any contribution from our former subsidiaries, because we sold our investments in these companies earlier this year. Taking this into consideration, on an apples to apples basis, FFO actually increased from $0.29 per share to $0.30 per share between the third quarters of 2005 and 2006.

Across our markets, real estate fundamentals continue to remain positive. Occupancy continues to increase or remain steady and net effective rents are generally increasing across the country but the rate of growth in some real estate metrics is starting to slow down. For example, even though net absorption is still in excess of new deliveries across the entire country, total net absorption is decreasing year-over-year and development activity has picked up in some markets.

Leasing activity in our Company continues to remain strong. Leases for 1.4 million square feet were signed during the quarter which included a 9% roll up in rents, 6.3 years of average term and about $18 per square foot in capital commitments. On a rolling quarterly basis capital commitments increased in the third quarter because of a higher percentage of new leases signed versus renewals and zero leasing activity in Oahu, Hawaii during the quarter, compared to about 690,000 square feet of leasing activity in Oahu during the first six months of 2006. As we have discussed in the past, given the nature of our investments in Hawaii, our leasing activity there usually has very little capital commitments.

Also this quarter included some noteworthy leasing activity. We signed an 8 year lease for about 57,000 square feet in Boston with a biotech firm, and this lease includes about $64 per square foot in capital commitments for the build-out of some lab space. We also signed a 12-year lease for approximately 25,000 square feet which includes about $58 per square foot in capital commitments to a law firm in Philadelphia. This is the first lease we have signed for the space Comcast will be vacating in 2008. Overall Company occupancy remained relatively flat: 93.4% as of September 30th. There was a 20 basis point decline between the second and third quarters because we had about 50,000 square feet more of expirations than leasing activity during the quarter.

Overall same-store Company-- same store Company NOI decreased by 2.3% during the third quarter. However, this metric was also affected by the decline in lease termination fees between 2005 and 2006. Excluding lease termination fees, same-store NOI actually increased by 0.4% during the third quarter. Generally, on a same-store basis, increasing rental rates have more than offset the 40 basis point decline in same-store occupancy.

With regards to our portfolio, all of our major markets are performing well, with Oahu, Hawaii and Austin, Texas posting the greatest increase--increases in same store NOI with about 18% and 19% respectively. In Oahu this increase is primarily driven by rent increases whereas in Austin it represents increases in occupancy. Philadelphia continues to move up and down on a same-store basis, depending on different variables, but we continue-- but we continue to believe that we are very well positioned in this market with less than 4.5% of this market's square feet rolling through the end of 2007 and in-place rents equal to or below market rents.

The Washington, DC market has really gone through a lot of changes in the last six to nine months, and we would no longer characterize it as one of the strongest markets in the country. Development activity has been very robust in Washington, DC, with development square feet exceeding net absorption for the last two quarters. As a result occupancies started to decline in this market. Nevertheless we-- we remain very well positioned in the market with 96.6% occupancy and in-place rents equal to or below market rental rates.

Boston continues to perform better than expected. Market occupancy steadily improving in very limited new development activity. Unfortunately, this is our only major market where we may have some lease roll downs next year. But it is important to remember that the square feet expiring between now and the end of 2007 represents less than 0.8% of the Company's entire square feet. As a result, any rent reductions in this market should have minimal impact on our overall financial performance in 2007.

It is important to note that we no longer provide information on the Atlanta market because it no longer meets our criteria of a major market. We define a major market as a metropolitan area that represents either 5% of total square feet, 5% of total revenues, or 5% of total NOI. Atlanta has not met any of these three criteria for three consecutive quarters. In total, HRPT maintains operations in over 50 different markets. If our operations in any of these markets meet our major market criteria in the future, we will begin providing separate information for that market.

With regards to investment activities, during the first six months of 2006, we have purchased 47 properties with 3 million square feet for $307 million and sold our investments and our former subsidiaries for $350 million, recognizing gains of $116 million. During the third quarter, we made no acquisitions, but sold four properties in Atlanta, Georgia for 68,000 square feet for $9.2 million, and recognized gains of $1.2 million. Subsequent to the end of the quarter, we acquired 15 properties with 1.7 million square feet for $120 million. We will discuss these acquisitions in more detail during our year end conference call.

In addition, as of today, we have two properties with 167,000 square feet under agreement to purchase for about $29 million, and one property with 30,000 square feet under agreement to sell for $4.5 million. Of course, these agreements are subject to closing conditions, and the purchase or sale of these properties may or may not happen in the future. Although our pace of acquisitions has been slowing this year, we continue to focus on purchasing high quality and well-leased office and industrial properties, located in less high profile markets, as well as look for opportunistic development and redevelopment projects in select markets.

We also continue to actively look at selling some of our B and C class properties located in lower tier markets where we are unlikely to grow our portfolio. As we end the quarter, HRPT continues to be very well positioned with among the highest occupancy rate, longest average remaining lease term, and highest credit quality tenants in the office REIT sector. Furthermore, the diversity of our portfolio holdings and tenant base adds to the security and stability of our cash flows and dividend payments. However, as a result of this strong operating position, we may not have as much growth potential as some of our peers, which have lower occupancy, shorter lease terms, more specialized or geographically focused property holdings, or engage in more speculative development activities, but by running the Company in this conservative fashion we may be a good investment for investors focused on income and modest capital appreciation.

I'll now turn the call over to John Popeo, our CFO.

Thank you, Adam. Looking first to the income statement, rental income increased by 10.7%, and operating income increased by 3.7% during the third quarter of 2006. The year-over-year quarterly increase in rental and operating income reflects increases from properties acquired between July 1st, 2005, and September 30th, 2006, partially offset by over $3 million of lease termination revenue received in the third quarter of 2005 from a tenant in one of our non-major markets. Our consolidated NOI margins were 60.4% for the third quarter of 2006, and 62.2% for the third quarter of 2005. The decrease primarily reflects lease termination revenue received in 2005, and increases in escalatable expenses in 2006.

Current quarter EBITDA decreased by around 1% from the same period last year, reflecting the sale of our investments and former subsidiaries in March 2006. We realize gains on these sales of approximately $116 million during the first quarter. Interest expense increased by 21.2%, reflecting the increase in average debt outstanding, which was used primarily to finance acquisitions in 2006 and 2005, and the 170 basis point increase in weighted average interest rates on our floating rate debt from 4.2% during the three months ended September 30th, 2005, to 5.9% during the three months ended September 30th, 2006.

Net income available for common shareholders for the third quarter of 2006 was $22.1 million compared to $26.8 million for the third quarter of 2005. FFO available for common shareholders was $0.30 per share for the third quarter, compared to $0.32 per share for the prior year, and $0.30 per share for the second quarter of 2006. As Adam mentioned, the year-over-year decline in FFO per share primarily reflects the sale of our investments and shares of former subsidiaries in March 2006 and lease termination revenue received during the prior year. In October, we declared a dividend of $0.21 per share, which represents 70% of our third quarter FFO. Our board considers the dividend level on a quarterly basis, and they are comfortable with this current payout ratio.

During the quarter we spent $18.4 million on tenant improvements and leasing costs, and $5.6 million or $0.10 per square foot for recurring building improvements, including lobby renovations, an elevator and other systems upgrades throughout the portfolio. We paid $8.1 million on development and redevelopment activities during the third quarter.

Turning to the balance sheet, on September 30th, we held $33.5 million of unrestricted cash. The $20.3 million increase in rents receivable reflects about $18 million of straight-line rent accruals during 2006. Rents receivable includes approximately $130 million of cumulative straight line rent accruals as of September 30th. Other assets includes approximately $86 million of capitalized leasing and financing costs.

On September 30th, 2006, we had $710 million of floating rate debt, $390 million of mortgage debt, and $1.55 billion of fixed rate senior unsecured notes outstanding. The weighted average contractual interest rate on all of our debt was 6.2% at the end of the quarter and the weighted average maturity was 6.9 years. In August we amended our $750 million revolving bank credit facility to reduce interest paid on borrowings to LIBOR plus 55 basis points and to change certain covenants to reflect current market conditions. The maturity date was also extended to August 2010.

Subsequent to quarter end, we raised $368 million in October by issuing 15.2 million shares of 6.5% Series D convertible preferred shares. These shares have a liquidation preference of $25 per share and each share can be converted into HRPT common shares at anytime at an initial conversion rate which is equivalent to $13 per common share. Unlike convertible debt these shares cannot be redeemed for cash, and can only be converted into common shares in the future. Net proceeds from this offering were used to repay $310 million outstanding on our revolving credit facility and to acquire properties during October. Fully diluted common shares outstanding will increase by approximately 29 million shares because of this offering which will result in a decrease in fully diluted FFO per share of close to $0.02 per quarter.

Our senior unsecured notes are rated BAA2 by Moody's and BBB by Standard & Poor's. The book value of our unencumbered property pool totaled about $4.9 billion at the end of the quarter, a secured debt represents 7% of total assets and floating rate debt represents 27% of total debt. At the end of the third quarter our ratio of debt to book capitalization was 50% and debt to market capitalization was 47%. Our EBITDA and fixed charge coverage ratios were 2.7 times and 2.2 times respectively. As of the end of the third quarter, we were comfortably within the requirements of our public debt and revolver covenants. After the issuance of convertible preferred shares in October debt as a percent of total book capital improves from 50% to around 44%, and floating rate debt as a percent of total debt improves from 27% to around 17%. As of today, we have $18 million outstanding on our revolving credit facility with $732 million of additional borrowing capacity.

In summary, we continue to believe HRPT's strong tenant base, limited near-term lease expirations, strong balance sheet, and current annual dividend yield of over 7% make HRPT a logical choice for long-term income oriented investors. That concludes our prepared remarks.

Operator, we are now ready to take questions.

[OPERATOR INSTRUCTIONS] And we'll take our first question from Phillip Martin, Cantor Fitzgerald.

Good afternoon, everybody. I --- just a couple of questions here. Can-- can you talk a little bit about the-- the trends going forward? It sounds like from what you said Adam --- office --- there's some slowing out there, but you are seeing some good rental growth, and even on the expense side, again, you had more new leases this quarter. What does the next 12 months look in terms-- I mean, you are pretty well occupied. So I'm just trying to get a handle on what the capital commitments per foot may look like over the next 12 months? As you look out-- do you expect more---a higher percentage of new leases versus renewals, et cetera? Just any color that you can give-- give us on that would help.

Sure, Phil well, generally what is going in the office market across the country from where we sit is--- on a day in and day out basis, what we have been seeing, let's say in the last quarter has actually been pretty good, and pretty strong, and healthy. Generally speaking, we are been more --- we, as a landlord have been more in the driver's seat than we were in, let's say last year maybe the year before that. What always gives us pause is we spend a lot of time doing a lot of research trying to understand what it's going to be like in the market in the future, and we're just starting to see things that give us some pause.

We look at the metrics -- net absorption, deliveries, job growth in certain markets, and then generally the state of the economy, and without question, things are still improving, but when we looked -- if we look at how things are improving in 2006, versus let's say 2005; 2005 there was a greater rate of growth, bigger increase in terms of let's say absorption or bigger increase-- bigger gains in occupancy. There was just more -- more activity. This year things are still better than they were last year. They are just not growing at let's say the same rate of growth.

So-- then we look out to the future and we say generally what is happening macro in the economy and specifically within some of our markets and some of the markets are giving us some concern. Washington, D.C. is a great example, where last year was one of our strongest markets. I can tell you now we-- we are concerned about D.C. We think there has been overbuilding, and I think that has started to reflect itself by the fact that occupancy rates in the market have started to dip a little bit, and we're lucky we don't have a lot expiring there, and what we do have expiring we feel pretty good about. But we think it's going to be tougher to lease in Washington. I think there'll be more options for tenants as they look out in 2007 and 2008.

Is it fair to characterize, then, that--on the rental growth side, it appears you're in the best position in some time in terms of where your rents are compared to market, but you are seeing leasing growth slow -- or leasing activity slow. Is that --

That's a good way -- that's not a bad way of thinking about it, Phil. But we are-- our in-place rents are probably based on where the market is-- we are at or below market everywhere except Boston, which we have talked about in the past. But everywhere else across the country and even including Boston, we look at the entire Company as a whole, we're pretty much right at market. So rental -- our rents are good -- what is in place is good, it's just that in terms of let's say absorption rates is what we're worried about in certain markets.

Now are they --- is the lower leasing activity going to drive the capital commitments per foot higher than you expected? Is 18, 24 at the high end?

Yes, I would say that's on the higher end. That may not be the high water mark, but that's on the higher end of where I think we'll be. This -- this quarter had a lot more new leases versus renewals. I think you asked before what is it going to be like the next 12 months. It's tough to tell you what it is going to be like 2007, but I can tell you the fourth quarter, it's probably going to look similar in terms of the ratio, in terms of new leases versus renewals. At least that's what I think it's going to look like for the fourth quarter. We're not going to have a lot of renewals, it's going to be a lot more new -- it's going to be more -- I'm not sure it's going to be 50% new leases, but it's going to be more new leases than let's say what we were running for the first two quarters or maybe the last three quarters, excluding this one.

In terms of capital commitments I think $18 is on the higher end. I think-- I think-- if you exclude Hawaii from our leasing metrics the last two quarters, we have been running more around $15. This quarter we had no Hawaii leases included in the metric, because we didn't do any leasing active in the third quarter in Hawaii, so it's not a huge jump but there has been a little jump maybe $15 to $18, but I'm not expecting it to suddenly skyrocket up or anything.

Okay so in this 15 to 18 level is probably a manageable range for the foreseeable future?

Yes, I would say so.

Okay. The next question I have-- your other markets-- I did notice Atlanta fell into that other markets, but -- and again, this might be termination fee related, too, but year-over-year NOI down 6.8% in those other markets. Excluding termination fees, where-- where does that NOI shake out? That seems weak.

Yes, it's flat.

Okay. So it is flat?

Flat without the same -- without the termination fees.

Okay. Okay. So there's-- so there's nothing significantly more negative going on in some of those other markets?

No, there's not-- no. No.

Okay. And my-- my last question is just an update on Hawaii. The-- I know you announced the storage projects, $17 million there last quarter. Can you give us an update on that? And also, I know that's an evolving market for you and you are continuing to find additional potential opportunities over there, can you just discuss anything that might be worth discussing?

Sure there's nothing new to talk about with regards to Hawaii in general. The self storage facility continues to be on track, we plan on opening it sometime in the second quarter of 2007, and the only reason we didn't have any leasing activity in the third quarter is we had a-- some turnover-- our-- the vice president that ran our office out there was relocated to the southeast and we had to hire somebody new out there so we're basically -- it was more personnel related than it was to any market issues that were occurring. We basically didn't have anybody out there for about a month-- and it took that new person--it's taking him a couple of months to get up to speed, but I think we'll be back on track in the fourth quarter and definitely by the first quarter --- first and second quarter next year in terms of what we'll be doing out there in terms of leasing activity.

Okay. Okay. Just other potential projects out there? Even on the-- the leasing front longer term, where there's some potential opportunities with land or tenants, anything on that front?

Nothing to rep-- we have talked about in the past with investors and on these calls about there's lots of potential for the lands out there. There's lots of redevelopment opportunities with regards to some of the retail sites that we have out there. Specifically we have a Safeway site with an Osco drugstore. The lease is up in a few years. There's a potential to redevelop that into some sort of mixed use office retail, but there's nothing to report on this call or today to say that a decision has been made or an initiative has started. There's still-- there's a lot of potential but nothing to report of.

Okay.

Okay?

Thanks for the answers.

We'll go next to John Guinee with Stifel.

Hi, thank you.

Hi, John.

Quick question. On page 23 of your supplemental you've got development, redevelopment, and other activities which are anywhere from 2.6 to 8.1 million a quarter, is-- is all of that pertain to existing product or is any of that new development independent of your existing portfolio?

About half of it is what you would call new development and prob-- not pertaining to our existing portfolio, and probably half of it is adding to a building, completely renovating a building, things like that.

Okay. And then I apologize for having to ask this again, but I-- with your convertible note-- your convertible preferred?

Yes.

You are going to treat that as in the money already and increase your share count appropriately? Is that how we should take that?

Yes, that's the accounting rule.

We don't have a choice.

There's no choice there.

Okay. Perfect. All right. Thank you.

Yes.

And we'll go next to Charles Place, Ferris Baker Watts.

Good afternoon.

Hey, Charles.

Let's see here. Can we talk-- can you comment a little bit more on the-- on the NOI margin and -- and the outlook for that? That seems to be something that I'm just consistently overestimating. And is it-- you indicated earlier it was lease termination fee income from last year that inflated-- maybe inflated last year's margin, and I mean-- is the 58% for office a good run-- run rate for your NOI margin?

I think it probably is, Charles. Again, if-- if you simply do the math, you'll see that if you knock out $3.2 million or so of lease termination revenue from the prior year, and if you also consider the fact that we do-- we are seeing some bumps in some of our escalatable expenses in Boston and in Washington D.C., specifically in utilities that are pretty much fully recovered, that has a downward impact on our NOI margin, so I think that is a good run rate to answer your question.

Okay. Looking at the-- the rental rate growth that you had for the quarter at 9% on a GAAP basis, is there any-- is there a couple of markets in particular that-- that-- and maybe that-- that's been addressed already. I assume Austin is because that's been such an active market for you recently, but where are the markets where you are seeing the best rental-- rental rate growth.

Hey, Charlie, it's Adam. It's-- it's southern California, it's Austin as you pointed out. It's, believe it or not, Boston, this quarter we definitely saw some of that rate growth was in Boston. And some of it was also in some of our other markets. Places like Denver, and Phoenix, Pittsburgh, so there's been some rental increases across the board.

Okay. And the-- and the occupancy trend seems to be sliding in a negative direction. Is that-- what kind of insight is there in looking at that? I mean is-- is there-- do you all when you look out at the marketplace, kind of looking at your rollovers next year, certainly D.C. with 8%-- or 8.7% of your leased square feet in the area, Boston, southern California, I mean, do you see this as an opportunity to-- is there going to be some ability to increase occupancies in that-- in those markets with rental rate improvement--

You know, Charlie, that's a good question. It's a constant balance. We could-- we could-- we could get occupancy, I think up over 95% if we wanted to in this Company if we-- if we wanted to basically lower our net effective rents that we were willing to take, and I think we have become a little bit-- we have talked about this in the past-- we have become a little bit, since the beginning, really, of this year-- a little bit more, I guess focused on making-- maximizing the return on a lease, and-- and looking at the opportunities whether or not you let a space-- maybe you don't lease a space today but you let it sit idle for six months because you believe the market is going in your direction and you're not willing to give a very large-- let's say concessions to tenants and a good example of that is some of the stuff going on in Austin.

I'm not sure where occupancy is going to go. I don't think it's going to dip significantly next year. It might dip a little bit, but again, it might go up a little bit. It's -- it really depends on where-- how much we can drive rate, how much we can push in terms of not giving tenant concessions. It's a balancing act. And I think we feel pretty good about 93.4%. I think we even would feel pretty good if that even dropped a few-- a little bit more, we wouldn't be too nervous, I think internally here. I-- anything putting a number out here-- and I'll probably regret it later-- but I don't think we get nervous really, until 92%. That's sort of my personal alarm bells would probably be going off at 92%, but I think we have a long way to go, and I think we're very well leased as it is. And I think this is the time when you do try to push rates in certain markets when you do have a good amount of occupancy.

Yes. And this is again-- I guess I got to revisit this point one more time -- this 29 million extra shares that are going to go into the share count that's $0.02 a quarter that you are going to be expecting in dilution?

Correct.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS] And we'll go next to Scott Sedlak with A.G. Edwards.

Hi guys. I was just hoping you could touch upon dividend coverage a little bit more, John. When you look at it on a FFO basis, I think you're right around 70%, 71%. When you look at it on a FAD basis, including all of the capital expenditures, you are significantly higher than that. Can you just touch upon that in terms of where your FAD coverage ratio is right now?

Sure. It's a not a figure that we publish, but you can pretty easily do the math just from the information in the operating supplement, but, if you -- if you reduce FFO by straight-line rents and factor in what we reported in the supplement for CapEx, you come out to a number that's roughly around 130%. What I see in the office repair group, I don't-- I don't-- no-- no specific REIT comes to mind that is below 100%, and it seems like the average for the group that I'm seeing anyways is right around where we are, maybe a little less. What we do see is some positive trending, for HRPT if you look back over the past six to seven quarters. In the prior year we were paying for some very expensive leasing that we did all the way back in 2004. So I do see the payout ratio trending positively.

Okay. When-- when would you expect to get below 100% in terms of a FAD payout?

That's-- that's a tough call to make. I mean, as you know it all depends on-- on the CapEx side what the mix is between new leases, renewals, how leasing goes in general, but our hope is sometime by maybe around 2008 to be very close, if not below 100%.

Is it fair to assume the dividend would remain in the same level without growing until the payout ratio is below 100?

Scott, it's Adam-- I'm not-- I can't-- I don't know---that's probably a fair-- a safe assumption.

Yes.

But I would not rule out a dividend increase, even if we-- even if we were --- we could raise the dividend, even if you calculated your AFFO payout ratio at over 100% if we felt comfortable that we were making a lot of strides towards improving it. And I think we have been making a lot of strides towards improving it over the last year, and I think we have been very focused on-- on that ratio, so I think-- it's a safe assumption, but I wouldn't bank on it being absolute.

Okay. Adam just one more question in terms of Detroit you guys have previously talked about that market with regards to the Hallwood transaction; any update you can provide there in terms of maybe trying to sell some of those assets?

Sure, Scott. The Detroit asset as you know has been a little bit-- the small amount of assets represent less than--- just over 1% of our total portfolio, the thorn in our side. The assets are actually performing okay. They have been running consistently at the same occupancy for the last two years, around 80%.

And I'll be honest. We have looked at trying to sell them; it's just not a seller-- most of the country you could sell stuff and get a pretty good return on it. Detroit today is not a market you want to be selling in, and so that's the primary reason why we are where we are with Detroit. I mean, it's not-- it's not that we don't-- we wouldn't sell them, it's just a difficult-- it's not the right time to be selling them, and they are not falling off the cliff in terms of operations. They are-- they are performing pretty steadily.

Actually one last question in terms of the rents you provided before the mark to market of zero to below to slightly below market. I'm assuming that's on a GAAP basis. Where would cash run stand?

Probably with-- no more than 5%-- 5%.

Okay. Thank you very much. Appreciate your help.

Thank you. And we'll go next to Sri Nagarajan with RBC Capital.

Thanks. First question on-- I think Adam in your prepared remarks you talked about lab space redevelopment, is that something that you guys are looking at or is it just an —opportunistic thing that you guys are doing? Can you give us some more color on the exact Boston redevelopment that you are doing or--

Sure. Sure. Yes, it's down south of the city. It's-- it's one of the suburbs south of Boston. We have-- HRPT has about 18% of its rents come from medical-related tenants, and when we talk about medical-related tenants, we're talking about medical office buildings, and-- and lab space. I would say the two biggest areas where we got lab space is definitely southern California, and San Diego specifically, and in the Boston area, so-- and it's nothing unusual that we're doing this, it's just part of the reason I pointed out-- I wanted to point that out to people was those were some of the leases-- that was one of the leases that sort of drove the higher capital commitment in the quarter.

Okay.

So it drove the averages up and I wanted to highlight what was sort of behind it. It wasn't an overall increase it was more just a couple of leases we had signed, which as everyone shows lab space typically has high-- high capital--- high build-outs associated with it. So it's nothing in terms of a different strategy or anything with the Company it's-- it's more business as usual, and that's what it is.

In terms of I guess your remarks again that selling B and C assets in lower markets, I think there was an earlier question on Detroit as well--- extending that from a strategic perspective, why not harvest or dispose of assets when-- when conditions for, or cap rates remain flat or even compressing right now, given that the acquisition environment is still [up top] somewhere.

Yes, we-- we've-- well, I think we've-- we've sold over $300 million worth of what I consider-- you can call it not real estate, but it's investments this year in our former subsidiaries, and I think we're tracking for-- total dispositions versus total acquisitions this year we're almost about even, maybe a little bit more acquisitions than dispositions, but not much.

In terms of additional property sales, we evaluate it quarterly, if not more often in different markets, and I think we'll-- I think you'll continue to see us be probably a net acquirer over seller of assets in the foreseeable future, but you will see us look to sell B and C class properties and some of those-- second and third tier markets but it's not only just the second tier market it's also got to be market where it just doesn't make--- there's no economies of scale. We're not going to grow in the market, or there's special circumstances where-- for example, the Atlanta properties we sold this past quarter, someone may ask that's a market you have a lot of properties in. You've been growing in that market. Why did you sell four properties? Well, we sold the four properties, because these specific four were part of the larger Hallwood acquisition we made and these were four buildings that had gone vacant last year they were going to require a significant amount of CapEx. And the question was, do we invest all of that money in CapEx, or do we sell it for what I consider a modest profit or return on our investment? And that was sort of a special situation. We said, you know what? It probably makes more sense to sell these than to spend the money to redevelop them today. So we ended up selling it to somebody that was a partner who-- he is going to raze the buildings and going to build apartment buildings. So, it was actually some property that had some better and higher best---better and higher use than what we could have done with it.

One last question in terms of the variable rate I know it's now at 17% or so, what is the comfort level for you in terms of the variable rate debt or in terms of keeping your credit facility a little higher and obviously as a rejoinder are there any big portfolios in terms of the acquisition pipeline?

I'll start from your last question first. Big acquisitions, nothing more than what we talked about in the prepared remarks in terms of-- some buildings we acquired subsequent to quarter end, and then we got about $29 million worth of acquisitions in agreement. There's nothing-- we-- we evaluate-- a lot of stuff, but there's nothing to speak of at this point which is a large acquisition out there. What was the second--?

In terms of your level of comfort (multiple speakers) yes.

Yes, variable rate debt. I think where we were prior to doing the convert probably-- what was that 26-- high 20s is probably our-- sort of the threshold amount. We probably wouldn't feel comfortable going any higher than that, so somewhere between where you are now and the high 20s is probably the zone of comfort.

Okay. Great. Thanks.

Thank you, and that's all of the questions we have time for today. I would like to turn the conference back over to Mr. Adam Portnoy for any additional or closing remarks.

Thank you for joining us on our Q3 quarter conference call. We will be at NAREIT in San Francisco later next week, and we hope to see many of you there. Thank you.

And ladies and gentlemen, that will conclude today's call. We thank you for your participation. And you may disconnect at this time.